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Digital Derivatives WeeklyApril 2, 2020

Digital Derivatives - Bitcoin - The Silver Lining?

Jitender Tokas
Chief Business Officer
April 2, 2020
What's in this post?

    Digital derivatives is a weekly newsletter bringing you the latest research, information and analytics from the cryptocurrency derivatives space brought to you by Delta Exchange.

    For last week’s edition, click here.


    Market Moves

    • Bitcoin (BTC) – $6,644.95 (+5.03%)
    • Ethereum (ETH) – $137.98 (+3.88%)
    • Ripple (XRP) – $0.177 (+2.40%)
    • Bitcoin Cash (BCH) – $226.26 (+4.35%)
    • Litecoin (LTC) – $39.74 (+2.41%)
    • EOS (EOS) – $2.28 (+3.05%)


    Derivatives Insights

    Positives After Bitcoins Worst Month Since Nov 2018

    With the end of March 2020 comes the end of the worst-performing month for Bitcoin since November 2018. Bitcoin, whilst being up nearly 70% from the lows of March 13th, has ended the month down 24%, which is the biggest monthly fall we’ve experienced since November 2018.

    The fall in November 2018 is interesting to look back on. Throughout the month of November 2018, the price of Bitcoin fell from $6550 to $3645 – roughly a 44% fall – to mark the bottom of the BTC “bubble break bear market”. The local bottom here, around $3300, was reached on December 13th, 2018, and can be categorized as “the bottom” – the lowest price point for BTC since the meteoric rise of Q4 2017.

    November 18 crash and subsequent rise

    The local bottom of November/December 2018 paved the way for Bitcoins 6 month rise from $3300 to $13600 – a 310% gain between December and June 2019 – and a similar event does not seem to be outside the realm of possibility now.

    In roughly 41 days, on May 13th, the Bitcoin network will experience it’s 3rd halving. The Bitcoin halving can best be explained follows:

    Bitcoin miners are rewarded a set amount of newly-issued BTCs when a new block is produced – every 10 minutes or so. In 2010, roughly 50 BTCs were issued per block as a miner reward. Every 210,000 blocks – every 4 years or so – the miner/block reward is cut in half. This fixed issuance rate cut (50%) will continue every 4 years until the new block reward per block becomes 0 (estimated by year 2140).

    As of now, the block reward is 12.5 Bitcoins issued per block (per 10 minutes). On May 13th, this will decrease by 50%, to 6.25 Bitcoins per block, effectively cutting the issuance rate of new Bitcoin in half to lower the relative supply of new Bitcoins.

    There are two potential scenarios here:


    Scenario A: The Bitcoin halving (along with all future halvings), being transparent and immutable, is already factored in the current price, and thus we should not expect significant price action or volatility. This assumes an efficient market with rational investors making their decisions based on the vast array of readily-available information.

    Scenario B: An alternate scenario is that a relatively fixed or stable demand for Bitcoin leads to demand outweighing the immediate supply, causing price to rise.

    Bitcoin has matured significantly following the networks first two halvings so it would be risky to assume that the pattern will continue now; however, it is interesting to note the price action surrounding previous halvings, as showcased in the graph above.

    Looking at options pricing of the halving and associated price volatility tells a different story. The options market calculates a 3% chance of BTC setting a new all time high (ATH) by the end of June, whilst the probability of a new ATH by the end of September is roughly 6%.

    On the other hands, using the stock-to-flow model (described in more detail here) to predict the impact of halving leaves us with a post-halving price between $55,000 and $100,000 per BTC. The stock-to-flow ratio takes into consideration the amount of a commodity (in this case Bitcoin) outstanding divided by the amount produced annually.

    To take a different perspective, we can take a look at the outstanding supply of stablecoins. The growth of stablecoin supply is often seen as an indicator for ‘sideline funds’ – i.e. funds ready to be deployed. Looking specifically at Tether USDT – the leading stablecoin in the space – there’s room for optimism. Over the past 30 days the supply of circulating USDT has grown by +30%, and its market capitalisation now sits at $6,169,664,619 – its highest ever value. This suggests a sustained inflow of money over the last couple of months.

    In addition to this, Open Interest, specifically on BitMEX Perpetual Contracts, have been trending upwards since the crash on March 13th, up 21.7% in just the last 7 days. This further signals an inflow of money into the BTC markets and lends strength to the current positive price trend.

    Growth in Open Interest (OI) On BitMEX

    Financial modelling is not a hard science and attempting to predict the price response to the upcoming halving can prove stressful. However, these models tend to become self-fulfilling prophecies if enough traders lend credit to them.

    For miners, it’s a bit of a different story. TradeBlock – a provider of institutional digital asset trading tools – theorise that the cost of mining a single Bitcoin could jump to $12,525 post halving (double the current cost of $6851 per Bitcoin.) On a basic level the halving then means that Bitcoin miners need to run 2x the computations, with 2x the electricity usage, to earn the same amount of BTC post-halving as pre-halving. At a current price of $6655 per BTC, this means miners are just about approaching profitability per BTC mined. The numbers above take strong assumptions into account, including both hash rate and cost of electricity, and are therefore estimates.

    In line with this mining cost estimate for BTC we can deduce that miners expect the price of BTC to rise leading up to the halving (to around $12000), lest we experience a drastic drop in the hash rate as unprofitable miners reduce their resource focus on mining Bitcoin.

    We will continue to cover BTC price developments in the run-up to the halving so stay tuned.


    Delta Developments

    Pankaj Balani On Whalepool

    Delta Exchange Founder & CEO, Pankaj Balani, stopped by the Whalepool forum to discuss all aspects of the Delta trading platform.

    delta exchange - whalepool

    Specifically, the topics covered included:

    • The development of Deltas thorough risk system.
    • Our unique and diverse futures offering on altcoins.
    • The use of a robust index for anti-manipulation.

    Watch the full interview here.

    Fair Price Marking On Crypto Derivatives Exchanges

    The majority of leveraged exchanges, including Delta, use a Fair Price Marking to determine postion price marking. This means that open positions are marked at ‘Fair Price’ instead of the last traded price to protect against the combination of volatility and low order book depth.

    Our analyst, Pooja Shah, wrote a detailed breakdown of how Fair Price Marking works. While it exclusively focuses on Fair Price Marking at Delta Exchange, the underlying ideas discussed are relevant for all crypto derivatives exchanges.

    Take a look at the article here and let us know your thoughts on Twitter.

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